Bypassing the Bidding Process

The Sears Tower isn't selling to the highest bidder — it's selling to the only bidder. The 110-story Chicago landmark is one of many properties trading without a formal bidding process.

Seller MetLife Inc. initially listed the property through Eastdil Realty. But a group of New York investors swooped in with an attractive preemptive bid that persuaded MetLife to forego a marketing blitz and cut a direct deal expected to close in June. The bid was undisclosed, but the Chicago Tribune has pegged the sale price at $835 million — or $9 million more than the building's last appraisal.

Observers believe that a hot seller's market combined with intense competition for few offerings is pushing transactions beyond traditional marketing channels. Typically sellers work through brokers employed to secure the highest price from the largest pool of potential buyers.

Bob White, president of Real Capital Analytics, says the volume of so-called “off-market” deals spiked to more than $25 billion for the year ending March 31, and that's more than double the $12 billion volume of the previous 12 months.

White attributes the increase to buyers' determination to avoid a heated bidding war at all costs. In fact, many are buying projects under development, or are contacting owners directly to make preemptive offers on properties like the Sears Tower. “[The Sears Tower buyers] stepped forward with a price to prevent their having to bid against 50 others,” says White.

Scott Latham, executive director at Cushman & Wakefield, says off-market deals are a better use of the buyer's time and money when competition is so hot. “You're not winning every deal, and it can cost between $50,000 and $100,000 to present a non-contingent offer to a seller,” he says. In other words, the cost of due diligence can be steep for a potential buyer.

One of the market's most aggressive buyers says sellers are chiefly driving this trend. David Steinwedell, chief investment officer of Atlanta-based Wells Real Estate Funds Inc., says roughly 40% of his company's acquisitions in the past 18 months were off-market deals, and most began with a call from the seller.

Owners considering a sale may eschew open marketing to avoid alarming tenants, potential tenants or lenders in cases where the owner is investigating refinancing and sales options simultaneously. “If it doesn't happen, then nobody knows it was really marketed, and they can go on their merry way as the owner,” Steinwedell says.

Cushman & Wakefield's Latham says sellers may also forego open marketing to expedite the transaction process. A traditional deal takes about six months, while off-market deals run 10 days to two months on average.

From the broker's perspective, off-market deals are just another way to earn a commission. Brokers often make the contacts that initiate negotiations. “For broad marketing or for a rifle shot, they're being paid either way,” Steinwedell says.

Still, Jeff Johnson, chief investment officer at Equity Office Properties Trust, says owners choosing an off-market approach have a tougher time getting a top price. “There are so many buyers out there, it's difficult to know what price will clear the market,” Johnson says. “There might be somebody out there who would pay more. You just don't know until you've marketed it.”

Other issues can also dog the process, if a seller chooses not to use any brokerage talent in the deal. As Steinwedell notes, some of the hardest deals are often principal-to-principal. “Having a broker in the middle can help the process dramatically. There's a buffer there, and it adds an extra level of scrutiny,” says Steinwedell.

Ultimately, Cushman & Wakefield's Latham believes that typical marketing plans still garner the best prices. “You can achieve good results from an off-market situation,” he says. “But it may not squeeze every last dollar off the table.”